Sovereign CDSs as a risk indicator

Sovereign credit default swaps (CDSs) have come under fire from some regulators, who claim speculative activity in the market contributed to a rise in borrowing costs for certain European countries. However, while the Hungarian central bank believes there is a need to regulate the CDS market, its analysis suggests CDS spreads are a useful indicator that provide more accurate information on Hungarian sovereign credit risk than bond yield spreads. By Lóránt Varga

The sovereign credit default swap (CDS) market has come under scrutiny from regulators across Europe in the wake of the eurozone debt crisis. Some politicians accused speculators of using it to push spreads wider and reap quick profits – a trend they believe exacerbated the problems faced by some European countries.

So far, however, there have been few studies devoted explicitly to the functioning of the sovereign CDS market. Gathering information on this sector is essential for the Hungarian